4

Profits Fall Off for Costco

Shares of Costco (NASDAQ: COST) are down today after the company reported a 15% drop in profit. Unusually for the company, it cited weak gross margins as the source of the profit slump, something many investors didn't expect from Costco and its membership-based business, which usually has more robust gross margins than the traditional retailers.

In this video from Thursday's Stock of the Day, Motley Fool analyst Simon Erickson says he sees the gross margin weakness as coming from overly aggressive discounting to move inventory, which directly affected the company's bottom line. Same-store sales and revenue were both up this quarter, however, which raises the question: What is the most important metric to focus on when understanding Costco?

Simon says that for Costco the most important metric continues to be membership growth. The company added another 4.3 million members in total last year, which he still sees as a healthy number that should inspire investor confidence. While the stock looks more expensive today than a traditional big-box retailer from a price-to-earnings perspective, Simon still likes its membership model better than traditional retail-business models, and still sees the stock as a long-term buy today.

Should you own Costco forever?As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.